While cannabis stocks have lit up following the Drug Enforcement Agency’s agreement to review its classification of marijuana last month, the move is also sparking momentum in the ETF space.
The Amplify Seymour Cannabis ETF (CNBS) is up more than 37% since Aug. 30, when the U.S. Department of Health and Human Services recommended easing marijuana restrictions. HHS advised the DEA to consider reclassifying cannabis as a Schedule III drug instead of a high-risk drug, putting it in the same category as testosterone and ketamine rather than being lumped in with heroin and LSD.
The news triggered a widespread rally among several cannabis funds. The Roundhill Cannabis ETF (WEED) has soared nearly 71% since the announcement, while the AdvisorShares Pure US Cannabis ETF (MSOS) and AdvisorShares Pure Cannabis ETF (YOLO) have jumped 64% and 45%, respectively.
“This is just an initial rally on the news,” Magoon said. “We think that there could be a lot more upside in the future for this very disruptive industry that’s based on a plant.”
He explained that a potential reclassification of marijuana as a Schedule III substance would allow cannabis companies to write off business expenses, inevitably increasing cash flow and profitability.
“It also means that it’s more likely that the SAFE Banking Act could be passed in Congress,” he continued, “which would give cannabis companies the ability to bank and participate in capital-formation activities that are more like traditional companies.”
Magoon explained that a federal reclassification would be transformative in the consumer packaged goods (CPG) space, advancing marijuana’s multibillion-dollar U.S. industry to broader investment and partnership opportunities.
“Cannabis can disrupt health, wellness, the traditional alcohol industry, even pharmaceuticals, he said. “Consumer packaged goods and pharmaceutical companies are going to be able to now look at these cannabis companies as M&A targets to partner with them.”
Beyond the benefits for cannabis companies, VettaFi Vice Chairman Tom Lydon believes that federal deregulation will be advantageous for the exchange-traded fund industry as a whole.
“The great thing about the ETF industry is there’s a lot of opportunity,” Lydon said in the same interview on Wednesday. “We’re going to have our ears to the ground to see if there are additional cannabis and ETF filings.”
Lydon pointed out that Amplify ETFs holds a great “first mover advantage” with its pair of cannabis-based funds. The firm recently acquired the ETFMG Alternative Harvest ETF (MJ), which has rallied more than 31% since HHS gave its guidance.
“I think we’re going to continue to see more assets flow into that space as it’s more widely accepted,” he said.